The confusion about taxes

Before you waste your time reading this, I have to warn you that I’m not an economist. My single class during college on economics for engineers cannot be considered background for what I’m about to discuss here, but I felt like it and, well, that’s the beauty of self-publishing.

Anyway, now onto the point: I was reading an article on The New Yorker today:

NOT INSANE by Hendrik Hertzberg

The article discusses in general a controversy on how to give stimulus to the economy. He said that one of the latest suggestions by a group of republicans (that have to be contrary to the government – but that’s reserved for a post on politics, which that’s not the goal of this one) is to do a “payroll-tax holiday for a couple of years”. In other words, not collect tax on salaries for some time, effectively increasing people’s salaries.

The author then says that it’s not a terrible idea, just not the best one and then suggests considering this later as a substitution for taxing things we don’t want people to do, like carbon footprint, or using natural resources, polluting, etc.

It’s an interesting thought. Tax what you don’t want people to do, and not tax what you want to happen more often. Great alignment of incentives, right? Well, I quickly see four main problems with this:

1) It causes a shift on all finances: you make more money, but your cost of living also increases (as companies are now taxed more to produce things). In other words, automatic inflation. And what happens on a time of inflation spike? Everything that you’ve saved immediately loses value. You stop trusting savings, which increases the risk of the market and makes investments harder to happen.

2) It makes taxing more subjective: how to tell that my pollution should be taxed more than the other company’s pollution? And I’m planting trees. Should I be getting some of my tax back even though it’s hard to tell exactly how much a tree is offsetting my carbon footprint? It’s very easy to get money out of money. It’s all in one unit of measure.

3) Globalization: if you don’t make the whole world adopt this, suddenly all your products become pretty much impossible to compete with foreign products. It’s already hard because of the cheap labor in countries like China and India, now you add more taxes on the products. You can try to “fix” some of it by raising import taxes, but then you’re going against the main conclusions of globalization: the competition and increased market of a globalized world is worth in the long term any cannibalization of local markets.

4) What about the things that are not tied to consuming? What about health care and social security? If you have a taxing plan that allows people to pay less taxes if they are smart, the income of the government will reduce over time instead of increase, which works against the needs for any first world country with populations that will keep aging and needing help. Yea, yea, we are talking about republicans that believe that public health and social security are a waste of government money and that people should be choosing what they want to do with their own health. I did consider this line of thought for a long time, but that goes against people’s nature. I don’t know how many times I’ve heard sick people deciding that it was better to just go to a pharmacy and pick up something that does not require prescription and get the wrong thing, just because going to a doctor was too much hassle. That’s a sign of a broken system.

Anyway, as I said, who am I to have ideas about this? I’m sure those people that are proposing this had endless discussions with economists that built multiple models of the economy and believe that it does make sense in the medium or long term. It was an interesting article, nevertheless. I’m actually enjoying starting my week reading The New Yorker and skimming through the Wall Street Journal every morning. It’s all because the Kindle 2 is a much better device for reading news.

The only problem with this is that I’m reading less books now. It takes me about 1 hour to go through the WSJ, which only leaves about 30-40 minutes of book reading every day. On Mondays that’s usually taken by reading The New Yorker. So now I probably need to start reading when I’m at home too. So many things to do… But that should be the topic of another post some other day.

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